NOVOLIPETSK DOES SOMETHING NO RUSSIAN STEELMAKER DOES IN RUSSIA – NEGOTIATES COST, JOB CUTS AND CRISIS MEASURES WITH UNIONS

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Novolipetsk Metallurgical Combine (NLMK), owned by Vladimir
Lisin, has done something that no Russian steelmaker is on record
as doing in the current downturn for steel production, sales, and
profits; nor in the downturns which have preceded – 1991-93,
1998-99 and 2008-09. It is negotiating with steelworkers and
their unions before deciding on how to cut costs. There’s a catch
— that’s happening in Belgium, not in Russia.

For months there have been public demonstrations in the
traditional steelmaking Wallonia (Walloon) region of Belgium,
between Liege and La Louviere, 112 kilometres to the southeast.
Union, regional government, political parties of the right and
left, and consultancy studies have recommended a variety of
options for reviving the steelmills and keeping steelworkers
employed in the region; none would cost less than €300 million.
There is also sharp local argument over whether
the region would be better off in the long run doing without the
steelmills.

According to releases from NLMK, the management has opened
negotiations with steelworkers at the La Louviere plant before
finalizing a programme of cost cuts. Among the options aired
publicly is the reduction of 600 jobs at the 2.6 million
tonne-capacity plant, which is currently producing at a level of
just 1.2 million tonnes. Yevgeny Lukashevich, spokesman for NLMK,
told CRU Steel News that for the past five years the plant,
previously operated by a joint venture between Duferco and NLMK,
has received annual orders for no more than 1.4 million tonnes.
“Projections for 2013 are very pessimistic and do not involve the
restoration of pre-crisis indicators.” Steel products turned out
at La Louviere include hot and cold-rolled coils for application
in the automotive, construction, and engineering industries.

According to Lukashevich, “in this situation the company should
take urgent measures to stabilize the situation and exit from a
crisis situation. The management of the enterprise addressed to
the representatives of the workers the request to jointly analyse
all the possible ways to reduce losses and restore the balance of
the La Louvière and until the end of November to find an
acceptable solution. Otherwise, the future of the enterprise will
be under threat.” Asked to confirm local and Moscow press reports
of job cuts, he said that until the management-union negotiations
are completed, “the company does not comment on the course of the
discussion.” A year ago, when NLMK and Duferco wound up their
joint venture holding, Steel Invest and Finance (SIF), the
rolling assets went to NLMK, and Duferco took section mill and
other assets in Belgium.

Not since 1991 has a Russian-owned steel group held direct
negotiations with steelworker or mining unions to reach a
consensus on financial controls, manning, and profit and
productivity targets. NLMK’s approach to talk first before idling
production and cutting jobs, is decidedly different from the cut
first-talk later approach adopted by ArcelorMittal at its mills
in Liege, as well as across the border in France at Florange.

In Russia the latest round of quarterly production and financial
reports from the major steelmakers reveals how falling demand for
steel is affecting production and profit. NLMK’s financial
release, issued on Friday, reports that its worldwide sales
revenues came to $3 billion, down 8% compared to the second
quarter; operating profit dropped 38% to $262 million; earnings
(Ebitda) fell 19% to $483 million, while net profit plunged 40%
to $167 million. On the production side, NLMK said it is managing
to keep plant utilization (aka output and production jobs)
relatively stable, with volume at 3.72 million tonnes, just 2%
down from the 2nd quarter. Sales reported in terms of tonnage
were at the record high level of 3.8 million tonnes, unchanged
from the previous quarter. This, according to NLMK, reflected
growing demand from the Russian construction sector, where sales
tonnage grew 4% to 1.05 million tonnes, and in machine-building,
where sales grew 5% on the quarter to 120,000 tonnes.

In its steel operations in West Europe and the US, NLMK’s
operating results were far worse. These are at mills in Belgium,
France, Denmark, and Italy, as well as in Pennsylvania and
Indiana. These operations reported a 3rd quarter downturn of 19%
in sales tonnage; a 26% retreat in sales revenues; and a 96%
plunge in operating profit. Over the first nine months of this
year, the foreign steelmills have run up an operating loss of
$229 million. NLMK’s Russian steel operations have compensated,
keeping the entire steel division in the black, with an operating
profit of $467 million. NLMK’s Russian steel production accounts
for 65% of the group’s total in tonnage.

Much the same picture can be seen in the 3rd quarter reports from
the other major Russian steelmakers – growth in Russian demand,
stimulated by direct Kremlin spending and indirect fiscal
stimuli, has kept the profit line buoyant, and covered losses in
foreign steel operations. Evraz, controlled by Roman Abramovich,
cut steel production at all its overseas mills – in the Ukraine,
US, Europe, and South Africa – during the September quarter, but
offset these declines by an increase in crude and finished steel
output at its Russian mills, which account for 80% of the group’s
global total.

Severstal has also reported a similar 3rd-quarter trend —
positive growth in Russian steel sales, but decline in the North
American division. Globally for Severstal, owned by Alexi
Mordashov, crude steel output came to 3.76 million tonnes; that
was down 1% from the second quarter. Crude steel production in
Russia was 2.65 million tonnes, unchanged on the quarter, while
in the US the volume slipped 4% to 1.1 million tonnes. Total
steel product sales for Russia rose 6% quarter on quarter to 2.73
million tonnes, while they fell 10% at Severstal North America
(SNA) to 1.08 million tonnes. The Russian share of Severstal’s
steel production is 81%.

Magnitogorsk Metallurgical Combine (MMK), Victor Rashnikov’s
property, reports that its Russian mill performance in the last
quarter was generally positive, with a 6% increase over the 2nd
quarter in crude steel to 3.19 million tonnes, and 3% growth in
finished steel output to 2.86 million tonnes. The weakness in the
operational report was at MMK Metalurji (formerly Atakas) in
Turkey. There crude steel output was slashed to 170,000 tonnes,
down 40% from the 2nd quarter. The Russian share of MMK’s steel
output is 92%.

The weakest performance domestically has been at Mechel, the
steel and coal-mining group owned by Igor Zyuzin, which has
reported that production of crude steel slipped by 2% to 1.71
million tonnes in the September quarter, compared to the previous
quarter.. In the sales results, long steel products grew by 8% on
the quarter to 1.13 million tonnes, while semi-finished billets
were up 6% to 726,000 tonnes. By contrast, sales of flat
products, including stainless steel, fell back by 19% to 143,000
tonnes. Almost 60% of the flat steel sales reported by the
company come from steelmills taken over by Mechel from the Estar
group, after its owner Vadim Varshavsky defaulted on more than $1 billion of
obligations in 2009. Mechel owns loss-making steelmills in
Romania and the Ukraine, which it is now trying to sell, along
with coalmines in the US.

All the Russian steelmakers warn that the fourth-quarter results
will be worse. But for the time being, Russian steelworkers are
saying little about it. The one flashpoint has been in the
Sverdlovsk region, where a series of strikes have occurred this
year at the small pig-iron and cast iron producer, Verkhne
Sinyachikhinsky Metallurgical Plant (VSMZ). The plant’s managing
company, called Nigmas, was ordered into bankruptcy by a Moscow
court in proceedings that ran from April to July. Debts of the
plant were reported to exceed Rb1.4 billion ($440 million).
Production had been halted at the plant last December, and since
then the plant workers have mounted several demonstrations to
recover past-due wages and severance pay. Partial payments
followed.

The latest demonstration began last week for payment of wage
debts totalling Rb5.5 million ($175,000). At the same time local
prosecutors say they have begun an investigation of fraud
allegations. Lovano Trading, an offshore company based in Cyprus
and a Saratov-based company called Volga Sar, are reportedly the
owners of the plant, and most of the debt is owed to Petrocommerz
Bank of Moscow. That almost a half-billion dollars in loans could
have been raised against security of much less value is the basis
for suspicion of fraud.

Russian steelworker unions have been controlled by the steel
company owners more tightly than the coalmine owners have been
able to control the coalminer unions. Short-lived, often
suppressed protests do occur from time to time in Russian steel
towns, though. They broke out in 2009, for example, after
Varshavsky walked away from his debts and his mills at Rostov,
Zlatoust, Gurievsk, and Nytva. Though small and isolated, the
reactions were sufficiently sensitive politically for regional
governors to agree with the federal authorities on bailout
measures. As prime minister in July 2009, Vladimir Putin was
pressured to intervene personally to protect the workforce and
payroll of the fareast steelmill, AmurMetall.

Each of the Russian majors was asked to say what negotiations
they have held this year with their Russian steelworkers on
production, cost and job cuts. Here is how they reply:

Lukashevich for NLMK says his company has no comment. Kseniya
Petrushko, spokesman for Evraz, responded that the request has
been forwarded to the company specialists and she waits on their
reply. That was a week ago.

Anastasiya Mishanina, a spokesman for Severstal, says her
company’s anti-crisis measures were discussed during the Investor’s Day
in September, though she conceded the steelworkers weren’t
involved. As for communicating with steelworkers and unions on
these issues, she added: “we have the so-called ‘business system’ of Severstal in which employees
are regularly heard on the ideas of efficiency, optimal use of
resources and so on. There is no response to the crisis;
efficiency is required at all times.”

MMK’s spokesman, Polina Rudyaeva, promises to reply when she has
collected the information.

A Mechel spokesman replies: “Steps to reduce production costs and
increase the efficiency of labour, are always openly discussed
with employees and the unions. Solving such issues are worked out
jointly. Working with collectives focused on increasing
productivity, saving resources and raw materials, and increasing
the efficiency of labour is ongoing. In particular, there is
participation of the trade unions through the discussion of
planned measures in the professional collectives, in regular
meetings of enterprise management with labour collectives, in
management meetings and dialogue with the leaders of the trade
union committees of enterprises. In addition, to increase the
efficiency of labour and cost savings there are the targets of
the staff bonus system for efficient operation, and professional
skills competitions…”

The Chairman and Deputy Chairman of the Mining and Metallurgical
Union of Russia, Mikhail Tarasenko and Alexei Bezymyannykh,
refused to answer.

Read the original article on Dances With Bears. John Helmer is the longest continuously serving foreign correspondent in Russia, and the only western journalist to direct his own bureau independent of single national or commercial ties. Copyright 2012.